Accrual accounting is an accounting method that records revenues and expenses when they are earned or incurred, regardless of when cash is actually exchanged. Under this system, revenues are recognized when they are realizable and earned, not necessarily when cash is received, and expenses are recognized when they are incurred, not necessarily when they are paid.
Key features of accrual accounting include:
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Revenue Recognition: Revenue is recorded when a product or service has been delivered, and the earnings process is complete, even if payment has not yet been received.
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Expense Recognition: Expenses are recorded when they are incurred, which means that costs are matched to the revenues they help to generate, in accordance with the matching principle.
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Financial Reporting: Accrual accounting provides a more accurate picture of a company's financial position and performance because it reflects all financial transactions, regardless of the timing of cash flows.
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Better Measurement of Financial Performance: This method allows for more relevant information regarding profitability over a period, particularly for businesses with credit sales or significant accounts receivable and payable.
Accrual accounting is the standard approach used by most large businesses and is required by Generally Accepted Accounting Principles (GAAP) in the United States and the International Financial Reporting Standards (IFRS) used by many other countries.
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